Gap is doubling down on one of retail's deadliest mistakes

Mallory Schlossberg/Business InsiderGap is known for its frequent sales.
  • Gap Inc. reported disappointing 2018 first-quarter earnings for its namesake brand on Thursday. Same-store sales were down 4%, and heavy discounting weighed on profit margins.
  • Gap’s CEO said promotions were necessary to clear out inventory.
  • The brand has become a discount haven. In its latest sale, customers can get as much as 70% off of a wide range of items if bought online.
  • While some retailers have scaled back on discounting, Gap does not seem to show signs of slowing down. According to Morgan Stanley, its level of promotions hit a seven-year high in February and March but were down year-on-year in April.

Gap is a discount haven.

Until Saturday evening, you can find up to 70% off “every single thing” online.

This isn’t just a marketing ploy to lure you in. We checked online, and even the brand’s latest collection is on sale.

Summer jeansGapSummer jeans on sale at Gap.

While this sale is scheduled to last only six days, it’s not unusual for Gap to offer discounts. In fact, 40%-off signs have become a common sight at its stores.

In a call with investors on Thursday, Gap CFO Teri List-Stoll said management had made some “strategic decisions to aggressively clear inventory through sell-off.”

“My experience now has been, and this is universal, is if you have too much inventory or the wrong inventory, holding onto it does not make it better,” Art Peck, the CEO of Gap Inc., said.

The perils of discounting

According to Morgan Stanley’s quarterly discounting index, which tracks discounting activity across several stores, Gap Inc.’s level of promotions hit seven-year highs in February and March but were down year-on-year in April.

The report showed that rival stores such as American Eagle and Abercrombie also ramped up discounting during the first quarter of 2018. Our visit to an Abercrombie store last month demonstrated this.

These stores’ rampant discounting goes against the grain of what many other retailers such as Michael Kors, Coach, and Ralph Lauren are doing. These stores have been vocal about their commitment to cut back on markdowns, believing that they are detrimental to the brand’s perception among consumers.

Gap did not immediately respond to Business Insider’s request for comment.

In August, Ralph Lauren CEO Patrice Louvet said discounting was threatening the company’s brand image and profit margins. He said that shoppers would spend money only on “exciting” apparel and that “exciting isn’t selling a generic product with more and more discounting.”

Heavy discounting has been the flavour of the past decade as retailers try to appeal to price-conscious consumers scarred by the recession. As a result, consumers have become hooked on discounts and usually aren’t willing to pay full price.

Peck, who oversees Gap, Banana Republic, and Old Navy, likened reducing promotions to a “game of chicken.”

One of the main reasons retailers use sales is to clear inventory. To avoid having excess inventory, many of these stores, including Gap, have been looking to streamline and tighten up their inventory levels.

In an earnings call at the start of last year, Peck said the time it took for certain Gap products to go from the design board to stores had shortened to 10 weeks from 10 months.

By speeding up the supply chain, Gap can react more quickly to changing trends. Inventory levels and styles would ideally be better matched to demand, which means less leftover stock to find its way into the discount racks.

Whether this will happen remains to be seen.

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